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Sharia compliant JISA

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AlCapwn
AlCapwn Posts: 34 Forumite
Part of the Furniture 10 Posts Combo Breaker
edited 5 March 2020 at 2:13PM in ISAs & tax-free savings
This appears to be a niche topic I can't find much info on so hoping someone here will know :)
I'm looking to open a JISA for my son which will be Sharia (Islamic Law) compliant. This means there won't be investments in a bunch of otherwise typical items, e.g. interest paying bonds, financial companies, arms, etc.
I'm new to investing and it seems like Sharia compliance is a limited market. I've only found the following (can't post links yet):
Red Rose Assurance: hxxps://www.redroseassurance.co.uk/red-rose-assurance/our-products/junior-shariah-isa.aspx
This looks good overall but I found a Which article (which I can't track down now) that says the charges there are higher than usual so I am having some doubts. This invests in HSBC Islamic Global Equity Index Fund
hxxps://thechildrensisa.com/shariah/
This is 'adventurous in nature' which I am not too keen on. The annual charge looks like it's lower than RRA and invests in Aberdeen Islamic Global Equity C GBP
My questions are:
  • Are there any I've missed?
  • How do the charges compare? 
  • Does this appear to be a good long term strategy? My son won't have access to the money until he's 18
Thanks

Comments

  • AlCapwn
    AlCapwn Posts: 34 Forumite
    Part of the Furniture 10 Posts Combo Breaker
    Unfortunately that wouldn't be suitable. The main thing is it needs to be Sharia compliant - socially responsible is a subset of that but there are still companies which might not be included for Sharia compliance purposes.
  • Alexland
    Alexland Posts: 10,183 Forumite
    10,000 Posts Seventh Anniversary Photogenic Name Dropper
    edited 7 March 2020 at 2:40PM
    Yes seems to be a very limited market. It might be better to hold the investment in an adult ISA where you would get slightly more choice. The fees are still likely to be in the 'not-cheap' range.

    I had a good experience with Wahed Invest although in truth I was only trying them out for a signup bonus they were offering and they seem to be small player.
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Post of the Month
    edited 7 March 2020 at 11:20AM
    AlCapwn said:
    This looks good overall but I found a Which article (which I can't track down now) that says the charges there are higher than usual so I am having some doubts. 
    Perhaps they mean the charges are higher than they would usually be with mainstream investments. If your portfolio construction needs to follow specific laws for which there isn't a large market in this country (because they are not laws of this country or any other EU country) then the fund manager is doing some relatively niche work in investment selection or filtering, for a relatively small pool of customers interested in participating in their collective investment scheme. So it can be costly per pound invested, whereas a less filtered index product would be readily available from 0.1-0.3% ongoing charges a year.
    This is 'adventurous in nature' which I am not too keen on.
    Shariah compliant funds for retail investors tend to need to be categorised as 'adventurous' because the the average investment fund used by the general population will be less volatile than such funds.

    For example, a very standard thing in portfolio construction for a western market is to blend the possibility of capital growth and dividend income from equity investment with the more stable return of fixed income securities such as bonds, interest-paying cash deposits and other credit assets. That's how most of us on the forum would do it and there are loads of UK mainstream products to assist with those investment goals.

    However, Islamic finance frowns upon making profit by money lending or providing cash at an interest rate and making money just because you've got money.  Instead it wants you to make your money as a return from owning an share in a business which is doing something more than just providing finance to others. So rather than being able to invest in mainstream corporate or government bonds where you invest some loan principal in exchange for a fixed return (or buy it on the secondary market) you would have a much more limited pool of debt-like but sharia-compliant asset structures available, which have more limited availability and increase the theoretical risk above the risk of 'normal' bonds.

    To keep it simple, the products for long-term investment in pensions or JISAs that are offered to the mass market with a Sharia twist therefore tend to be equities-based. And therefore would be marked as 'adventurous' compared to traditional UK-promoted funds that would have utilised bonds to dampen the value swings you get with equities-only investing.

    Does this appear to be a good long term strategy? My son won't have access to the money until he's 18

    Bluntly, a better long term strategy (if by better we mean either cheaper or higher performing or lower volatility) would be to not restrict your investments to particular industry sector or company types - because less-diversified funds may be more volatile, or may miss out on opportunities for returns. Still, if your son believes it is best to follow sharia principles, and the investment is for the long term, then the results should still be better than not investing at all. 

    You mention that the son won't have access to the money until he's 18, but you don't say anywhere how old he is now. If he is two years old, then investing in an Islamic equity index fund or Islamic managed equities fund will be fine, because that's a suitable timescale over which to hold a 100% equities fund. However, if he's already 15 and would access it at 18, there is a significant possibility that the investment would be worth less when he came to access it than it is worth today.

    A cautious investor, or one who is not too keen on making 'adventurous' investments, would not buy a 100% equities fund for a teenager who would be spending the money at 18, as even five or six years is not really 'long term', and it's only in the long term that you should expect the actual returns you get to be in line with historic long term averages (rather than randomly negative or positive). Still, if following sharia the options are limited - equities funds need to avoid certain industries, real estate funds need to avoid bond or loan returns, mainstream corporate or government bonds are out and the pool of global sukuk opportunities is in the few hundred billions rather than 100+ trillion like bonds or other credit-related opportunities would be.
  • Alexland
    Alexland Posts: 10,183 Forumite
    10,000 Posts Seventh Anniversary Photogenic Name Dropper
    edited 7 March 2020 at 2:39PM
    To keep it simple, the products for long-term investment in pensions or JISAs that are offered to the mass market with a Sharia twist therefore tend to be equities-based. And therefore would be marked as 'adventurous' compared to traditional UK-promoted funds that would have utilised bonds to dampen the value swings you get with equities-only investing.
    Here was how Wahed invested my £100 in a more balanced asset allocation by using some gold and sukuk sharia compliant bonds:

    £38.00 of Franklin Global Sukuk USD W Dis.
    £15.74 of HSBC Islamic Global Equity Index IC.
    £23.75 of iShares MSCI World Islamic ETF Dist (USD).
    £10.00 of iShares MSCI EM Islamic ETF Dist (USD).
    £9.99 of ETFS Physical Gold (GBP).

    I guess you could try and find some of these funds and ETFs on a DIY platform and build your own sharia compliant JISA although the trade fees might be expensive.
  • AlCapwn
    AlCapwn Posts: 34 Forumite
    Part of the Furniture 10 Posts Combo Breaker
    Alexland said:
    Yes seems to be a very limited market. It might be better to hold the investment in an adult ISA where you would get slightly more choice. The fees are still likely to be in the 'not-cheap' range.

    I had a good experience with Wahed Invest although in truth I was only trying them out for a signup bonus they were offering and they seem to be small player.
    Yes, I am looking into Wahed for myself. You've answered my next question about opening an an adult ISA instead, I will research this part further. 
    bowlhead99 said:(snipped for brevity)
    Thank you for excellent info. My son is 2 years old, so yes, this will be a very long term investment.
    Alexland said:
    I guess you could try and find some of these funds and ETFs on a DIY platform and build your own sharia compliant JISA although the trade fees might be expensive.
    I'm very much a novice and would rather have it managed for me. 
    Thank you both, lots of info to digest but I am feeling more confident about it! 
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